Black-Scholes equation

Updated: Aug 20, 2021

An equation used to value financial options. The Black-Scholes equation is based on a model of equilibrium in financial markets with continuous trading. That is, asset prices potentially change at every instant in time. The model assumes that there is a risk-free asset and that all excess returns are eliminated by arbitrage. The method of Black-Scholes is to develop a partial differential equation that the price of every option must satisfy.

Black-Scholes equation

The value of a particular option is found by solving the partial differential equation using as boundary conditions the characteristics of that option.

Reference: Oxford Press Dictonary of Economics, 5th edt.

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James is the Editor of Education for Invezz, where he covers topics from across the financial world, from the stock market, to cryptocurrency, to macroeconomic markets.... read more.